10-QPeriod: Q2 FY2014

CARDINAL HEALTH INC Quarterly Report for Q2 Ended Dec 31, 2013

Filed February 6, 2014For Securities:CAH

Summary

Cardinal Health, Inc. reported its fiscal second quarter and first half results for the period ending December 31, 2013. The company experienced a significant revenue decline of 12% for the quarter and 9% for the six-month period, primarily driven by the expiration of its pharmaceutical distribution contract with Walgreens. Despite the revenue drop, gross margin saw a 10% increase for the quarter and 9% for the six months, attributed to acquisitions, margin rate expansion, and new customer wins. Operating earnings showed modest growth of 2% and 3% for the respective periods, bolstered by the Medical segment's performance and improved margins in the Pharmaceutical segment, though offset by increased SG&A expenses and amortization. Net earnings from continuing operations declined 9% for the quarter but increased 7% for the six months, impacted by significant discrete tax items. The company's liquidity remains strong, with cash and equivalents increasing substantially due to improved operating cash flow and working capital management following the Walgreens contract expiration. A key strategic development during the quarter was the announcement of a generic sourcing joint venture with CVS Caremark, aimed at enhancing generic pharmaceutical sourcing.

Financial Highlights

47 data points
Beta

Revenue

$22.24B

6.0% Gross Margin

Net Income

$278.00M

1.3% Net Margin

EPS (Diluted)

$0.80

Total Assets

$25.01B

Cash & Equivalents

$2.74B

Free Cash Flow

-$27.00M

Financial Statements
Beta
Revenue$22.24B
Cost of Revenue$20.89B
Gross Profit$1.34B
SG&A Expenses$766.00M
Operating Income$519.00M
Interest Expense$33.00M
Net Income$278.00M
EPS (Basic)$0.81
EPS (Diluted)$0.80
Shares Outstanding (Basic)342.00M
Shares Outstanding (Diluted)346.00M

Key Highlights

  • 1Revenue declined 12% year-over-year for the quarter and 9% for the six months, primarily due to the expiration of the Walgreens pharmaceutical distribution contract.
  • 2Gross margin increased 10% for the quarter and 9% for the six months, driven by acquisitions, margin rate expansion, and new customer gains, partially offsetting the Walgreens contract loss.
  • 3Operating earnings increased modestly by 2% for the quarter and 3% for the six months, supported by segment profit growth and margin improvements.
  • 4Net earnings from continuing operations decreased 9% for the quarter but rose 7% for the six months, influenced by significant tax adjustments.
  • 5The company announced a 50/50 generic sourcing joint venture with CVS Caremark, expected to be operational by July 1, 2014.
  • 6Cash and equivalents increased significantly to $2.7 billion at December 31, 2013, from $1.9 billion at June 30, 2013, driven by strong operating cash flow and working capital management.
  • 7The company returned capital to shareholders through dividends ($0.3025 per share for the quarter) and share repurchases ($50 million in the six-month period).

Frequently Asked Questions

The primary driver of the revenue decrease was the expiration of Cardinal Health's pharmaceutical distribution contract with Walgreens on August 31, 2013. This single contract represented a significant portion of the company's revenue, and its loss had a substantial negative impact on reported sales figures for the current periods.

Despite the revenue decline, Cardinal Health managed to improve its gross margin through a combination of factors. These included positive impacts from acquisitions, margin rate expansion due to strong performance in generic and branded agreements, and increased sales from new and existing pharmaceutical distribution customers. These efforts helped to offset some of the profitability impact from the loss of the Walgreens business.

The announcement of a 50/50 generic sourcing joint venture with CVS Caremark is a strategic move to enhance the company's position in generic pharmaceutical sourcing. This venture, expected to be operational by mid-2014, will leverage the sourcing and supply chain expertise of both companies to negotiate generic supply contracts. While it includes a quarterly payment from Cardinal Health to CVS, it aims to improve efficiency and potentially reduce costs in the generic drug market.

Cardinal Health maintained a strong liquidity position. Cash and cash equivalents increased significantly to $2.7 billion at December 31, 2013, from $1.9 billion at June 30, 2013. This increase was primarily driven by robust net cash provided by operating activities, partly due to effective working capital management following the Walgreens contract expiration. The company also has access to revolving credit facilities and a commercial paper program.